A Guide to IR35 and the upcoming changes.
IR35 is the name for off-payroll working rules. It assesses whether a worker (sometimes known as a contractor) is actually a contractor or a “disguised’ employee”, for the purposes of paying tax.
The benefit for a contractors to work through their limited company is that they get an increased level of tax efficiency. The downside is that they do not usually get employee benefits (like holiday and sick pay), however they do get flexibility and control over their work.
This scheme is open to abuse whereby workers who are in fact employees but are classed as self-employed. They do this to enjoy tax benefits that they would not be entitled to. One way they may do this is to work through their own limited company, where in normal circumstances they would just be an employee for the initial company.
There is a benefit to the initial employer is they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits. The benefit for contractors is that they can pay themselves in more tax efficient manners.
To combat this potential abuse HMRC has designed the off-payroll working rules. But as you would expect these rules do have their issues. If you have any queries about the rules, or how they may affect you, you should always seek professional advice.
So, in essence IR35 is a set of rules to work out a workers status for tax. They are quite complex and not the subject of this article.
In the Public sector it is the hiring company who decides if the contractor is in fact an employee, and so taxed as such. In the Private Sector it is for the contractor to decide.
However, from 6 April 2021 there are changes to the rules:
All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
This is important because from 6 April 2021 if a contractor falls inside IR35 (and so is an employee), the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC.
The company hiring the contractor must give the reasons they believe the contractor is in fact an employee. This is called a Status Determination Statement. If the contractor disagrees with the Statement they can dispute it.
Small businesses are exempt from the changes, and these businesses it is still the contractor who determines their employment status.
These changes were supposed to come into effect in April 2020, but they were put on hold due to the COVID 19 pandemic. However, at the time of writing it looks like to Government appear to be pushing forward with them in April 2021.
The status of a worker can have an impact on them and the company hiring them, and so if you feel that this may be an issue for you as a worker, or hirer, then seek professional advice.